Financial options open up with contract packaging: spending money on outside packaging production often makes sense—as long as both parties make the right choices - Business: contract packaging
August 24th, 2007 by moniesThe best place to look may be outside your walls.
That’s the guiding principle behind outsourcing of all kinds, including contract packaging. But for companies that make use of these services, the question becomes: Just how much should someone else do?
The range of packaging contractor services includes everything from simply bundling basic traits to actually manufacturing the product. Relationships between product marketing companies and contract packagers can take on virtually an infinite variety of forms, from the simplest in-and-out bundling agreements to a baton-passing arrangement that allows companies to try out a project before committing to it.
To take full advantage of these options, companies must be prepared to make crucial decisions, including whether (and when) to bring an outsourced project in-house, who should own the machinery and the walls surrounding it and what will happen if the product underperforms.
Whatever form it takes, interest in contract packaging is on the rise, says Bill Pflaum, executive director of the Contract Manufacturing and Packaging Association.
“We’re getting an awful lot of calls from people about contract packaging,” Pflaum says. “A lot of them are doing research on it. They’re ranging from financial guys to venture capitalists to marketing guys to sales guys that are in machinery and materials. I think the contract packaging business is getting a lot better elevation and recognition.”
The basic motivation behind contract packaging is the same as for rely contracting: a desire to stick to what a company does best.
“Most of very large food producers and manufacturers in the country have a certain amount of excess capability,” says Steven Ames, president of contract packager Pack & Process Inc. “The choice more and more is for these companies to remain a marketing company and try to stay out of the production side of the business.”
Easing transitions
Consolidation in food, beverage and pharmaceutical manufacturing is a powerful motivation for using contract packaging.
“What happens [after an acquisition] is, they will look at taking stuff from these [acquired] plants and moving it to other plants that are underutilized or could handle that product,” says Michael Bilder, president of Peacock Engineering, a contract packager whose clients include Kraft Foods, Quaker and Unilever. “Invariably, when they get all done, they’ll have these two product lines are left over and they don’t have any plants to put them in, and they don’t want to leave a plant open just to do these two and they don’t want to build something new, so they move it to Peacock.”
Another common motivation is the need for limited numbers of odd sizes for a particular customer. Club stores are especially liable to demand one-of-a-kind packaging.
“Club stores want large, unusual packages, and each one wants something different,” Bilder says. “You might have a 32-count instant oatmeal package for BJ, it might be a 36 for Costco, it might be a 40 for Sam’s. They also want variety in their packages, too–three or four different flavors. When you think in terms of traditional manufacturing, that gives a plant fits.”
Some processors use contract packagers because they have equipment that’s too expensive or impractical for the processor to acquire. For instance, Ameri-Seal Inc., a converter of shrink-sleeve labeling, has branched into contract labeling of filled or empty containers. By buying pre-labeled empty containers, a company can save the capital equipment expense, as well as the time and space on the packaging line for label application.
Ameri-Seal’s new facility in Chatsworth, Calif., has a steam tunnel that costs 10 times more than conventional dry-heat tunnels but shrinks sleeves more evenly. Ameri-Seal is able to amortize the cost of the equipment based on its many contract customers, whereas a single processor might find it hard to justify the investment.
Smoothing start-ups
But perhaps the most common reason to use contract packaging is the desire to avoid committing large capital resources to a new product.
“The classic contract packaging and contract manufacturing scenarios are typically those companies that are starting up a new product,” says Ray Johnson, president of Doyen Medipharm, which offers contract packaging of medical devices. In most cases, a customer can’t justify automatic packaging of medical devices until sales reach the 1 million to 2 million unit level, Johnson says: “The introductory volumes can be a complete goose chase. Why should they gear up and have FDA validation on an operation for 10,000 units? The market results could come back terrible, and they often do.”
Author: Pan Demetrakakes
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